Evaluating the suitability of non-direct taxation for the Cayman Islands

Taxation

However, the issue of non-direct taxation has been constantly shifting back and forth. Where, those countries that would offer this kind of structure would often be thought of as an economy with low to negative growth. Then, as many countries began reducing various taxes, these views on non-direct taxation would change. A good example of this can be seen by looking no further than the OECD. Where, they would originally view those countries that would engage in such policies, as developing nations that were trying anything to increase tax revenues at any cost. The thinking was that when you reduce taxes dramatically, this will create an incentive for businesses to relocate to an area, but would do little to improve the revenues received by the government. Then, after it was shown by economist Arthur Laffer that lowering the direct taxation rate will help to stimulate the economy, these views began to change (Gupta 2004, pp. 131 -- 133) As more governments, would begin to embrace such polices. This would cause the OECD to rethink their policies, as they would begin to see how the low tax structure in these countries would help contribute to the underlying amounts of growth that were taking place. (McCann 2006, pp. 37 -- 53)

To determine if a non-direct tax structure is suitable for the Cayman Islands, we must first define what is suitable and how it would apply. For simplification purposes, our definition of suitable will be based upon the positive impact it is having on economic growth. This can be measured by comparing the underlying growth rates of the economy with the overall tax structure that is being utilized. A good way to achieve these objectives is: to compare the number of business establishing operations on the island and the total number of imports. Once this takes place, we would then compare these results, with the underlying amount of surpluses or deficits. This will provide insights, as to the effectiveness of the non-direct taxation system that is being utilized.

When you look at the total number of businesses that are establishing operations, in the Cayman Islands, it is clear that the tax structure is one reason why so many are relocating to the country. However, the amount of companies that will engage in these kinds of activities will depend upon, the underlying strength of the world economy. This is because, a large number of financial institutions have established a variety of different operations throughout the country such as: mutual funds, limited partnerships and bank trusts. In times of economic expansion, this would help the country to experience above average growth. Evidence of this can be seen by looking at the number of new companies that were registering in 2007, as this number would increase by 16.0%. When you compare this with 2008 and 2009, this number began to decline, with 2008 seeing a 9.7% decrease and 2009 showing a 33.7% decline. The GDP growth rate during this time was: 2.2% for 2007, 1.1% for 2008 and a decline of 6.6%. When you compare these two numbers, this indicates that the non-direct taxation system helps to expose the country to changes in the economic cycle. Where, the country will see a large number of companies relocating during times of economic expansion. The below charts illustrates these two numbers. (Cayman Islands Annual Economic Report 2007) (Cayman Islands Annual Economic Report 2008) (Cayman Islands Annual Economic Report 2009)

This is significant, because it shows how the non-direct tax rate is causing the overall number of companies operating in the Cayman Islands; to increase dramatically during times of economic expansion (while it decreases sharply during recessions).

The total imports will tell you how much how strong the economy is based upon areas that are being heavily taxed. This is because the non-direct taxation system, will tax imports and other items, as a way to raise revenues for the government. (McCann 2006, pp. 37 -- 53) By comparing this number with the information presented earlier, we can see the total effects of the non-direct taxation policy on the economy and the government. When you look at the total number of imports that were being received, it is clear that this figure is following a similar trend as the rest of the economy. With total imports coming in at: $881.6 million for 2007, $876.5 million for 2008 and $735.9 million for 2009. The below chart illustrates the overall declines that were seen with imports during this time. (Cayman Islands Annual Economic Report 2007) (Cayman Islands Annual Economic Report 2008) (Cayman Islands Annual Economic Report 2009)

This is significant, because it shows that regardless of the taxation system that is being utilized, the economy is still exposed to changes in the economic cycle.

To determine if this model is suitable for the Cayman Islands, we will compare the above numbers with the surpluses and deficits from figure 1.2. When you look at the information, it is clear that the non-direct tax model is helping, to increase the revenues that government is making dramatically. Evidence of this can seen, with the budget surpluses that the government has been experiencing since 1988. During two of those years (2001 and 2009), was when they ran a deficit. When you compare this with the large number of business that are registering during the times of economic expansion; this helps the country to experience above average growth. Over the course of time, this will allow the government to increase their revenues, as the strong economy and the favorable tax structure are encouraging businesses to spend money. At the same time, this helps to increase imports, as these businesses will require increased amounts of supplies and materials. This allows the nation to experience above average growth, as the favorable tax policy is continually stimulating the economy.